We’ve heard it said that real estate is finance. This is true in most HOAs and condominiums, where the vast majority of owners finance their homes with a loan. Many loans in the U.S. are made by banks, and many of these loans are sold by banks to the Federal National Mortgage Association, “Fannie Mae” for short, or to the Federal Home Loan Mortgage Corporation, nicknamed “Freddie Mac.” Fannie and Freddie create more liquidity – i.e., available cash – for banks, since the bank can generate a loan and then quickly sell the loan to Fannie or Freddie, and the bank can use the money from the sale to generate additional loans.
Banks that want to sell their loans to Fannie and Freddie must meet Fannie and Freddie’s requirements: Fannie and Freddie aren’t interested in purchasing loans that are likely to fail. Fannie and Freddie establish guidelines that banks and borrowers are required to meet. Although Fannie and Freddie have long required borrowers in condominiums to meet certain criteria, following the collapse of Champlain Towers South near Miami, the structural soundness of condominiums became a national concern. Fannie and Freddie recently enacted heightened reserve requirements and reporting requirements for condominiums.
In the past, Associations were encouraged to set aside 10% of assessments as reserves, but it was more like a rule of thumb. If a reserve study showed that reserves below 10% of assessments were sufficient, the loan could still qualify. Now, setting aside 10% of assessments as reserves is a requirement, even with a reserve study evidencing that lesser reserves will suffice. In some cases still, a lender may be able to request a waiver below the 10% requirement, but we expect the circumstances to be rare.
Fannie identifies the following documents that a lender may need to review to determine if a loan meets the new requirements: legal and recorded documents including the covenants, conditions and restrictions, declaration of condominium, or other similar documents that establish the legal structure of the project: project budgets, financial statements, and reserve studies; project construction plans; architects’ or engineers’ reports; completion reports; project marketing plans; environmental hazard reports; attorney opinions; appraisal reports; evidence of insurance policies and related documentation; and condominium project questionnaires. For further information, see Fannie Mae’s selling guide.
The final document in the list, questionnaires, is the first change that many condominiums and property managers will see. Fannie provides lenders with a questionnaire – which lenders are not required to use, but many use it or use a similar version – which describes the condominium’s operations, whether it is involved in litigation, what year it was built, and so on. In the past, a short-form questionnaire could suffice in some cases. No longer is that the case.
A new 3-page addendum to the existing questionnaire is the result of Champlain Towers. Of primary concern are the following questions in the addendum (edited for brevity):
- When was the last building inspection by a licensed architect, licensed engineer, or any other building inspector, and did the last inspection have any findings related to the safety, soundness, structural integrity or habitability of the buildings?
- Is the HOA aware of any deficiencies related to the safety, soundness, structural integrity, or habitability of the buildings?
The starkest difference from the pre-addendum questionnaire is that now banks are asking Associations to make affirmative representations about the structural soundness of the buildings, whereas in the past, Associations were simply providing information about the property, and the lender could make its own determinations. It’s safe to assume that lenders will seek to hold boards accountable if an affirmative representation proves incorrect.
Some boards are choosing not to make affirmative representations. Legally, this is permissible, even if it may aggravate an owner whose sale falls through. A board is not a lender’s “underwriter,” meaning that a board is not responsible for giving a lender assurance that a future, the prospective owner will repay its debt. Likewise, a buyer is free to choose whomever it wishes to borrow from, and the board is not obligated to risk liability to its current members by making affirmative representations to a future lender.
Given the number of lenders making loans that are sold to Fannie and Freddie (according to data from the Federal Housing Finance Agency, approximately 60% of all loans are acquired by Fannie and Freddie), a loan’s failure to meet Fannie and Freddie requirements could limit the borrowing options available to a buyer, which makes it more difficult for owners to sell their units.
Boards that decide to answer the condominium addendum should consider the following:
- Any affirmative representation should be based on reports from engineers, architects, or other qualified professionals.
- If a board does not know the answer, the board should simply say so. “I don’t know” is not a misrepresentation if a board genuinely does not know. Conversely, “I don’t know” could be a misrepresentation if the board does know (but see #3).
- Rather than making an affirmative representation about the condition of a building, a board could provide a qualified professional’s report to let the lender make its determination based on the report.
Time will tell whether the post-Champlain requirements result in large changes to the way condominiums operate. While Fannie and Freddie’s heightened requirements are only incidental to safety – Fannie and Freddie’s changes are intended to minimize the likelihood that a borrower defaults – the overall effect may be to increase safety. If you or your community is facing uncertainty about the new Fannie and Freddie requirements, we are available to assist.
ABOUT MIKE HUNTER
Mike Hunter’s practice focuses on community and condominium association law. He represents more than 700 associations across North Carolina.
Mike’s background includes real estate and litigation, with a concentration in the area of creditors’ rights, including debt collection, bankruptcy, foreclosure, lien enforcement, and collateral recovery.
From 1995 to 2006, Mike served as an assistant attorney for the Mecklenburg County Sheriff’s Office, primarily in the areas of civil process and judgment enforcement.
ABOUT BEN KARB
Ben Karb’s law practice is dedicated to commercial real estate transactions and advising HOAs and condominium associations in both North and South Carolina.
In his HOA and condominium practice, Mr. Karb regularly advises HOAs and condominium associations across a broad spectrum of issues, including the interpretation of covenants, contractual matters, and collection of assessments. Mr. Karb routinely attends membership meetings and assists communities with the ever-difficult process of amending their governing documents.
ABOUT BILL HAMEL
Bill Hamel primarily represents commercial and residential landlords, and homeowners and business owners associations. He offers more than 29 years of experience helping to protect assets and collect debts for his clients. Bill also represents many small businesses as primary outside counsel.
ABOUT OFFIT KURMAN
Offit Kurman, one of the fastest-growing, full-service law firms in the United States, serves dynamic businesses, individuals and families. With 16 offices and nearly 250 lawyers who counsel clients across more than 30 areas of practice, Offit Kurman helps maximize and protect business value and personal wealth by providing innovative and entrepreneurial counsel that focuses on clients’ business objectives, interests and goals. The firm is distinguished by the quality, breadth and global reach of its legal services and a unique operational structure that encourages a culture of collaboration. For more information, visit www.offitkurman.com.
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